It will be difficult for 2-year swap to fall much below current levels without the market beginning to price rate cuts

By Kymberly Martin

The NZ swap curve flattened further yesterday, following offshore moves.

Overnight, US 10-year yields fell below 2.05%.

Yesterday, NZ 2-year swap closed little changed at 3.80%.

The market prices little prospect of any rate action from the RBNZ this year, consistent with our own view. It also prices that the OCR will only be about 25 bps higher in 2016. So it will be difficult for 2-year swap to fall much below current levels without the market beginning to price rate cuts.

Meanwhile, the long-end of the curve will be the more obvious vehicle for expressing global concerns. Yesterday, NZ 10-year swap fell 5 bps to 4.06%, its lowest level since early-June 2013.

Overnight, US yields fell further as equities and the oil prices plunged and German Dec CPI was shown at just 0.1%y/y (EU harmonised). This was below incredibly subdued expectations.

US 10-year yields fell from overnight highs close to 2.13% to trade at 2.05% currently. German equivalents again slid toward 0.49% but have returned to 0.51%.

There are no domestic data releases scheduled for today. Tonight, Eurozone and UK Services PMI data will be released.